On 12 February, the Supreme Court handed down its judgment in a high profile jurisdictional challenge relating to group claims brought against Royal Dutch Shell Plc and its Nigerian subsidiary in connection with alleged pollution in the Niger Delta.  The decision will be of great interest – and potential concern – to all UK domiciled holding companies, particularly those in the extractive sector and others with businesses entailing environmental risks.

The Supreme Court unanimously allowed the claimants’ appeal, finding that the English court does have jurisdiction over the claims. It held that (1) the Court of Appeal materially erred in law by conducting a mini-trial in relation to the arguability of the claim at the jurisdiction stage, and (2) it was reasonably arguable that the UK domiciled Shell parent company owed a duty of care to the claimants: Okpabi and others v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd [2021] UKSC 3.

The decision provides further consideration of the circumstances in which a parent company may owe a duty of care to those affected by the acts or omissions of its foreign subsidiary, an issue that the Supreme Court considered in its recent judgment in Vedanta Resources PLC and another (Appellants) v Lungowe and others (Respondents) [2019] UKSC 20 (“Vedanta”) (which was heavily relied upon by the Supreme Court in this case).

The present decision emphasises that, in assessing at a jurisdictional stage whether there is an arguable duty of care owed by the parent company, the judge should not be drawn into a mini-trial to evaluate the factual evidence adduced, but should accept the factual assertions made in support of the claim by the claimants “unless, exceptionally, they are demonstrably untrue or unsupportable”. This will constrain defendants in seeking to challenge the factual basis on which claims are advanced, and many will be concerned that they are more vulnerable to weak and speculative claims being allowed to proceed in the English courts as a result of this judgment.

Further, UK domiciled holding companies will wish to scrutinise carefully the indicia by which it was established that a sufficiently arguable parent company duty of care existed in this case. The Supreme Court held that there was an arguable case that the parent company had: taken over the management or joint management of the relevant activity of the subsidiary; and/or promulgated group wide safety / environmental policies and took active steps to ensure their implementation such that a duty of care could arise.

The Supreme Court also adopted the analysis and conclusions of Sales LJ, who had dissented in the Court of Appeal, and who emphasised the significance of the fact that the Shell group is organised vertically on business and functional lines, rather than simply by corporate status. In the Supreme Court’s view, there was a triable issue as to whether this vertical organisational structure made it a group business that was in management terms a single commercial undertaking, with separate legal personality becoming largely irrelevant.

While UK parent companies will wish to give careful consideration to their own management structures, policies and practices in light of this judgment, significant uncertainty endures as to the precise circumstances in which a parent company duty of care will in fact arise. There is no special or separate legal test applicable to the tortious responsibility of a parent company for the acts of its subsidiary, and each case will need to examined on its own facts.

Background

The claimants (some 42,500 individuals from two different areas in the Niger Delta region) brought proceedings in the English courts against (i) Royal Dutch Shell Plc (“RDS”), the ultimate holding company of the Shell Group incorporated in England; and (ii) Shell Petroleum Development Company of Nigeria Ltd (“SPDC”), a subsidiary of RDS incorporated in Nigeria. The claimants allege environmental damage resulting from the operations of a joint venture operated by SPDC in Nigeria.

The claimants allege that the English parent company RDS owed them a duty of care which arose from the significant control which RDS allegedly exercised over SPDC’s operations. The Shell defendants challenged the jurisdiction of the English court on the basis that there was no arguable case against RDS as the anchor defendant, and therefore no jurisdiction as against SPDC as a “necessary or proper party” under the relevant jurisdictional “gateway” in Practice Direction 6B.

As previously reported (see here), Fraser J at first instance declined jurisdiction over the claim against SPDC, and held that there was no arguable duty of care owed by RDS to the claimants (on which basis the claim against RDS was struck out). The Court of Appeal (as discussed here), upheld the first instance decision by a majority (Sales LJ dissenting).

Decision

The Supreme Court allowed the appeal, in a single judgment given by Lord Hamblen. This means that the case can now proceed to a trial on the merits in the English court, subject to any decision by the defendants to renew any outstanding jurisdictional challenges which were not resolved at first instance.

Issue (1) – Material error of law

(i) Court of Appeal conducted a mini-trial at the jurisdictional stage

The Supreme Court held that the Court of Appeal (and High Court) materially erred in law in being drawn into conducting a mini-trial, and that led it to making inappropriate determinations in relation to (a) the contested factual evidence and (b) the documentary evidence. It found that the focus at the jurisdictional stage should be whether the summary judgment test of “real prospect of success” is satisfied by reference to the pleaded case, and it is not generally appropriate to evaluate the weight of the contested evidence (save where an allegation of fact is demonstrably untrue or unsupportable) at the jurisdictional stage; that is a matter for the substantive trial.

In respect of the contested factual evidence, the majority of the Court of Appeal preferred the RDS witnesses’ evidence, although there had been no opportunity for cross-examination and minimal disclosure from RDS. In respect of the documentary evidence, the Supreme Court found that the majority of the Court of Appeal erred in its approach to assessing the prospect of future disclosure, in particular in respect of internal corporate documents, and should have asked whether there are reasonable grounds for believing that disclosure may materially add to or alter the evidence relevant to whether the claim has a real prospect of success.

(ii) Other errors of law

Other errors of law were also made out, although the Supreme Court held that it was not necessary to determine whether such errors were material in light of the above material error of law. They include:

  • No general limiting principle in respect of group-wide policies: the majority in the Court of Appeal appeared to accept a general principle that a parent company could never incur a duty of care in respect of the activities of a subsidiary merely by promulgating group-wide policies and guidelines. This approach was found to be inconsistent with the subsequent guidance provided in Vedanta, where it was held that there was no such general limiting principle, and group-wide policies may in principle give rise to a duty of care.
  • Inappropriate focus on the issue of control: the majority in the Court of Appeal may have focused inappropriately on the issue of control. However, the Supreme Court held that control is just a starting point, explaining that “in a sense, all parents control their subsidiaries” and that “the control of a company and de facto management of part of its activities are two different things”. The court endorsed the position taken in Vedanta, and held that “the issue is the extent to which the parent did take over or share with the subsidiary the management of the relevant activity”, which will depend on the specific facts of the case.
  • No special category of parent company liability: following Vedanta, it was held to be wrong in law to analyse issues of parent company duty of care by reference to the threefold test in Caparo v Dickman [1990] 2 AC 605, or to treat the liability of parent companies in relation to the activities of their subsidiaries as a distinct category of liability in common law negligence.

Issue (2) – Real issue to be tried

The Supreme Court held that there is a real issue to be tried, and it is reasonably arguable that RDS owed the claimants a duty of care, having regard to the case set out in the pleadings and witness evidence, and fortified by the points made in reliance on two RDS internal documents (the RDS Control Framework and the RDS HSSE Control Framework). In reaching this conclusion, the Supreme Court preferred the analysis and conclusions of the dissenting judgment of Sales LJ in the Court of Appeal to that of the majority.

In particular, it was found that the two RDS internal documents show that the Shell group has a vertical organisational structure which involves significant delegation, such that whilst formal decisions are taken at subsidiary corporate level, these decisions (including in relation to operational safety and environmental responsibility) are generally taken on the basis of prior advice and consent from the vertical organisational authority. Therefore, how this organisational structure worked in practice and the extent to which RDS was involved in relation to the operations of SPDC raise triable issues, to which proper disclosure at trial is of importance.

The Court also held that there is a real prospect of relevant future disclosure being provided, which was specifically borne out by (1) an expert report in 2008 litigation in the United States in respect of Shell’s corporate structure, and (2) internal Shell documents disclosed in related Dutch proceedings relevant to the question of control and supervision.

(We note that the Dutch Court of Appeal recently handed down a merits judgment in those related proceedings, in which: (i) it held that the Nigerian subsidiary is strictly liable under Nigerian law for the pollution arising from pipeline leaks (since it had not shown that they were caused by sabotage); and (ii) the parent company RDS was not held to have incurred a duty of care with regard to causing the spills (since SPDC had not been found to have acted wrongfully), but the court did find a limited duty of care with regard to the response to the spills and ordered the installation of a leak detection system in the relevant pipelines.)

Neil Blake
Neil Blake
Partner
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Joanne Keillor
Joanne Keillor
Senior associate
+44 20 7466 2376
Alec Milne
Alec Milne
Senior associate (Canada)
+44 20 7466 2417
Danielle Wu
Danielle Wu
Associate
+44 20 7466 2181